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Was Tesco Corrupt?

Tesco is in a state of some chaos brought on by real market competition and has seen its business model threatened. It has always been a fighter – a company built on a culture that customers responded to well – a “pile ‘em high” culture that sought to bring low prices and wide choice.

This success was predicated by a market where the medium wealthy within society (middle class or in-work working class)– where most people existed – wanted good value and reliable products.

This outward superiority over the competition was managed through an internal capability highly based on staff knowing their job well, a high investment in systems that could gauge customers’ needs and supply them. To many suppliers it was a desperately competitive environment – with continuously lower prices and higher quality requirements.

How Corporate Culture can lead to Corruption

This culture was also, as far as can be seen, based on internal fear of failure – a numbers culture that relied on bullying to ensure that every day’s sales and profit figures were met. The Telegraph recently wrote on this subject where it said that: “Investigation into Tesco’s £250m profit shortfall unearths ‘corruption’ of culture.”

For any organisation, the culture employed for the business is critical but the headline suggests that the culture of Tesco indirectly led to corruption. This corruption came about, for instance, through accounting issues – the taking of discounts from suppliers too early (well before they could be guaranteed, apparently). The culture led somehow to the corruption – it seems that Tesco’s leadership was blind to the corruption (which, it is claimed, was only a set of accounting issues – where no-one directly benefitted).

This is the norm in some companies – especially in highly competitive markets where the differences between the competitors are hard to judge. In food retailing, the differences are price, range, full shelves, ease of use, location, quality and service. In 2014, most of the major retailers have products and services that are comparable. Tesco clearly believed that it was the best and that its strategy was right. That strategy included a culture that demanded much of its people. Overall, that is not a bad thing – until it becomes a culture that demands results no matter how achieved.

In my book “Last Line of Defense”, I described a business in a different market sector (aerospace and defense) that operated under similar cultural disciplines. It was in a business that was highly competitive and sales and bottom line results were critical. Senior management made demands on its staff. Having made those demands, senior management did not want to know how those demands were satisfied. They imposed a culture and required the response.

In the book, the CEO demanded that long-term accounting changes were made to turn losses into profits for a countermeasures system – the RWR-50:

“You have all made clear to me how the RWR-50 is going to establish Global as a world player in the defense business, at last living up to its name. Well, the first thing you have given me is a problem that must be dealt with to allow those prospects to be nourished and grow to maturity. I want your total support in my actions. Anyone that feels unable to live with this should be under no misapprehension: the only option would be to find alternative employment.”

For staff operating in such an environment, successfully meeting such demands often resulted (within aerospace and defense in the 1970’s until now) in corrupt practices. This included outright bribery of customers to buy their products. Many industries such as aerospace and defense, construction, energy have bad reputations for such methods of corruption.

In Tesco’s case, there is no suggestion that I have seen of any corruption such a bribery – at least not since the Potato bribery case of 2008 where Tesco’s potato buyer was paid millions of Tesco’s own money to swing purchases in one supplier’s direction.Indeed, The Grocer included an article only two years ago that suggested bribery and corruption remained a serious problem between supermarkets, wholesalers and suppliers.

However, just as the culture of the aerospace and defense industry directly led to corruption (with senior management often claiming denial of all knowledge of such impacts), so the culture in Tesco is highly likely to have led to accounting irregularities and the suspension of senior management. If these cases are shown to be true, then denial of knowledge is no different.

Indeed, the worst of the aerospace and defense companies, involved in long-term projects, have for many years developed ways to control accounting of such projects. Losses have been turned into profits – legally in many cases – as accounting for the future is indeterminate and unauditable. Notions of conservatism (supposedly the hallmark of good accounting) are thrown aside when senior management make different demands and shareholders need to see higher share prices and better dividends. This often led to accounting changes in that industry. It is no surprise that accounting issues are central to the likely problems at Tesco.

Governance and Culture

Of course, these accounting problems are an outcome of the culture. Bad management (misunderstanding changing market patterns and / or unable to resist them) relies more and more on a culture of threat and intimidation when things go bad or just tougher. Senior management then rely on the fact that they did not ask for accounting irregularities to be able to say that they had no knowledge – they are innocent (as innocent as Henry II was innocent of the murder of Thomas a Becket).

Some might also argue that no one directly benefitted from the corruption that is alleged to have existed at Tesco. This is also not the case. Accounting changes that improve stated profits have an impact on job security (no-one looks for “alternative employment” if they meet their targets), bonuses, share prices. Of course, unless the business then grows through increased demand, the accounting problems show up (as they have done at Tesco as the tide has gone out).

This is a serious issue for senior management. The Bribery Act of 2010 introduced tough requirements on senior management in cases of bribery. Where bribery and similar corruption is found in a company, senior management can no longer hide behind a veil of “no knowledge” of the bribery or corruption. It is now required that they are able to show that proper processes were in palace to ensure that such bribery and corruption were minimised or, better still, eradicated. Where it is clearly not the case, then senior management (Directors) can be held liable.

Good governance has now to be firmly enmeshed within a culture in a business as far as the Bribery Act is concerned. But, the absence of such good governance is shown in any company that has a culture of threat and intimidation that is likely to lead to pressure on staff to rig the statistics. In the Bribery Act, such a culture would be a sure sign of likely Director culpability. What is the difference within Tesco – if such accounting allegations are found to be the case? Although unlikely to be subject to the Bribery Act, the senior management culture at Tesco clearly led to a lack of due process that appears to be no less culpable. It is surprising that the Non-executive Directors and auditors also missed the clear links between bad culture and poor governance.

The pressure to make results no matter what resounds throughout a company. No one in the company could be immune from that pressure nor would they (at senior levels) be in any doubt of the repercussions that ensue. Accounting irregularities are an outcome of bad culture and bad governance. The Bribery Act has shown that senior management (the Board) has a direct responsibility for ensuring that culture must include good governance where bribery is a risk. There is a direct link between culture and governance and, where corruption exists, all senior management are normally culpable – processes should have been in place to minimise the risk of such “accounting irregularities”.

Bad culture leads to bad governance and potentially to corruption – the links are known and understood.

If the allegations are proven, then Tesco was corrupt. Probably not alone.